Business Expansion Loans: Are They Practical?

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 Many business owners look into growth through financing. When choosing this option, one has to recognize that the right loan at the wrong time can be detrimental. It is imperative that owners, managers and financial advisers evaluate current business conditions to ascertain which expansion loan and when the time is right.

There are a few things a business owner should consider before committing to an expansion loan.

Just because you are ready to expand does not mean the business is. A honest evaluation of the situation has to be assessed. Lenders will want to know if the business has the cash flow to manage a loan, and if the business can support timely, regular loan payments. From the lender’s perspective, only healthy businesses with solid creditworthiness are in any position to successfully request an expansion loan.

There is a lot of information about the importance of personal credit scores. That criteria can impact business as well. Ironically, most business owners have no idea what their business credit profile is and how their personal credit scores can influence growth. Before looking into an expansion loan, get your personal credit score from the major credit bureaus and check with bureaus like Experian, Dunn and Bradstreet, and Equifax to get business reports.

How to go about finding these loans has evolved. Even the smallest business is no longer relegated to a small range of lenders. Factors like the Internet, amount of money needed, the lifespan of the business, the industry and business credit profile can make your business attractive to specific institutions. Take for example a business owner looking for a loan in the vicinity of $500,000. A lender might prefer the owner be someone that has been in the business a while, has a strong personal credit score and has at least $2 million in annual revenues. An online lender could partner with someone that has less time in business and $250,000 in annual revenues. Looking at your business situation better fine tunes searches and enhances the chance of success.

While overall costs could be smaller, short-term loans may have higher periodic payments. Longer term loans come with smaller payments but may have higher total costs associated with the loan. A business owner will also have to consider ROI potential, cost of expansion and other factors.

The nature of the expansion also has to be taken into account. Details are a significant factor when it comes to sensible loan terms. Does a short-term loan make practical sense if the project itself is going to take a number of years? Expanding the serving area of an eatery will require less work than enlarging a loading dock 4,000 feet. One is better suited for a short-term loan and the other a long-term.  

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